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Preliminary Purchasing Managers’ Index from Caixin Media and Markit Economics dropped to 47.0 in September, missing the average estimate of 47.5 in a Bloomberg survey. Readings have been below 50 since March, which indicates that the Chinese economy is facing contraction. The falling Chinese factory manufacturing gauge, at its lowest since March 2009, underscores the challenges facing the economy as its old (exports-driven) growth engines stutter.

JP Morgan: Headwinds Ahead In Chinese Manufacturing Sector

The manufacturing sector continues to face major challenges such as excess capacity across a number of industries, as well as demand weakness, both domestically and externally. According to economists covering greater China at JPMorgan Chase & Co., the level of supplies of finished products, which rose to the second-highest level in the survey’s history, “points to further drag on industrial activity in the near term.”

Hank Paulson: China’s Economic Model Out Of Steam

Former Treasury Secretary Hank Paulson stated that China has an “economic model that has run out of steam”, and that the Chinese “need to place much more reliance on domestic-led growth and domestic consumption”. He believes that more competition is needed to spur China’s transition from an export-driven economy to one focused on domestic consumers. Capital outflows from the Chinese market has hit a record as concerns of China’s slowing economy continue to grow following the People’s Bank of China (PBOC) shock devaluation of the yuan on 11th August.

HSBC, World Bank: Effect of Monetary Policies Is Limited

Economists are expecting more accommodative monetary policies, i.e. one more 50 basis point cut of banks’ reserve requirement ratio in the fourth quarter, as well as for fiscal policy to play a larger role in bolstering growth in the Chinese economy.

However, economists at HSBC have a strong message for monetary policymakers who are hoping that their stimulus would help devalue their local currencies and spur exports. According to HSBC Global Chief Economist Janet Henry and Economist James Pomeroy, a depreciating currency is no longer as effective as it was in the past.

This is further supported by a recent World Bank study of developed and emerging economies, which found that currency declines between 2004 and 2012 were only half as effective at boosting exports as they had been in the previous eight-year period.

Investors Takeaway: More Due Diligence Required, Especially For Stocks with Chinese Exposure

Ruchir Sharma, head of emerging markets at Morgan Stanley, said that the impact of China’s economic slowdown will be felt more in financial markets, rather than in the economies. Using the US as an example, he opines that “economic impact in the U.S. is likely to be much more limited than any other region in the world. However, earnings impact might be much more than what people think”.

Stocks such as Genting (HOLD, TP $0.81), which derives a significant portion of its gambling revenue from Chinese tourists, is expected to face headwind should the Chinese economy continue to slowdown, not to mention the ongoing crackdown on corruption in China. The gaming industry is expected to remain weak. On top of that, the management’s cautious approach in granting credit to VIP players will also continue to weigh down on future earnings of Genting.

Trusts with Chinese exposure such as Mapletree Greater China Commercial Trust (BUY, TP $1.10) and Global Logistic Trust (BUY, TP $3.07) continue to enjoy strong ratings from research houses. However, investors should take note that the impact of a Chinese economic slowdown are not so immediate in the early stages of recession. Even if GLP and MGCCT continue to show strong momentum, investors need to exercise extra caution and due diligence.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

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